Q3 2022 Ares Capital Corp Earnings Call
Thank you all for joining and welcome <unk>.
<unk> Capital Corporation third quarter ended September 30, 32020 earnings conference call.
My name is Lisa and I'll be Appalachia.
At this time all participants are in a listen only mode.
As a reminder, this conference is being a conference is being recorded on Tuesday October 25th 2022, I will now turn the call over to Mr. John Steele Moms Moms, you can do about that at Investor Relations.
Let me start with some important reminders comments made during the course of this conference call and webcast as well as the accompanying documents contain forward looking statements.
And are subject to risks and uncertainties the company's actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its SEC filings.
Capital Corporation assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call. The company may discuss certain non-GAAP measures as defined by SEC regulation G such as core earnings per share or core EPS the cover.
He believes that core EPS provides useful information to investors regarding financial performance because it is one method. The company uses to measure its financial condition and results of operation.
A reconciliation of core EPS to GAAP net income per share. The most commonly directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call.
In addition.
A reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on form 8-K.
All per share information discussed during this call is basic per share information.
The company's Form 10-Q filed with the SEC This morning for such information.
Certain information discussed in this call and the accompanying slide presentation, including information related to portfolio companies was derived from third party sources and has not been independently verified and accordingly. The company makes no such representations are warranties with respect to this information.
The company's third quarter ended September 32022 earnings presentation can be found on the company's website at Www Dot Ares capital Corp, Dot com by clicking on the third quarter 2022 earnings presentation link on the homepage of the Investor Resources section.
Ares Capital Corporation's earnings release, and 10-Q are also available on the company's website.
Now I'll turn the call over to Mr. Kipp, <unk> Ares capital Corporation's Chief Executive Officer.
Thanks, John Hello, everyone, I hope, you're doing well and thank you for joining our call today.
I'm here with our co President Mitch Goldstein, and our newly appointed co President CT Schnabel, our Chief Financial Officer, Penni roll and several other members of the management team.
I'd like to start by highlighting our third quarter results and then provide some additional thoughts on the economic backdrop and the market.
This morning, we reported third quarter core earnings of <unk> 50 per share an increase of 9% compared to the second quarter driven by the benefits of rising interest rates and continued credit stability within our portfolio.
Importantly, if the prevailing market rates at September 30th had been in place for the full quarter, our third quarter core earnings would have been about 8% higher or roughly <unk> 54 per share.
The company is generating higher earnings with these higher prevailing base rates and we believe that we are well positioned to continue to benefit further from any future rate increases.
At the end of the third quarter, our NAV per share declined modestly by 1% as we took net unrealized losses largely due to the declining prices in the credit and equity markets.
Despite this the fundamental performance of the portfolio remains solid even as a more difficult economic backdrop appears inevitable.
The Federal Reserve has continued its tightening monetary policy to combat inflation and this is induced volatility in our surrounding markets.
And while we did anticipate these markdowns we take some comfort as these conditions are introducing a much more compelling environment for making new investments.
Mitch will discuss this in more detail later in the call.
From a market standpoint volatility in the leveraged finance and equity capital markets persisted during the third quarter as higher inflation and higher interest rates triggered increasing concerns around slowing growth.
Economic data continues to present, a mixed picture as corporate fundamentals remains solid yet the consensus outlook seems to point to demand softening at an overall slowdown in the U S economy.
The credit markets and leveraged finance markets in particular are exhibiting weak secondary liquidity and slowing new issuance.
These trends and the lack of competition from traditional sources has made it a much more lender friendly market and we are taking this opportunity to improve the strength of the existing portfolio and to price new transactions more attractively.
As our shareholders know, we've operated the company well through periods of volatility over the past 18 years.
We're taking the same approach today as we have in the past.
Focus on portfolio management, and risk mitigation, while becoming incrementally more selective on new deals.
We turned inward a bit to proactively manage our current portfolio to anticipate challenges and have early conversations about remedies.
We believe we can use the current market conditions to improve situations in our portfolio and also to finance larger companies that would otherwise turned to the liquid markets and less uncertain times we.
We believe our portfolio continues to deliver healthy overall performance and is well positioned to weather future market challenges.
Two measures of portfolio credit quality.
Our non accrual rate at cost and the weighted average portfolio grade both remained static quarter over quarter and show stronger metrics than our historical averages.
The stability in these credit metrics is supported by a healthy level of weighted average EBITDA growth of 13% year over year.
By historically, focusing our efforts on upper middle market companies with high free cash flows that operate in more resilient and less cyclical industries. We believe we've been able to reduce some of the credit risks that come from operating in a more difficult environment with higher market interest rates.
While we are closely monitoring these risks we believe they are manageable.
Augmenting the strong credit profile of our portfolio companies as our approach to portfolio diversification.
Our $21 $3 billion portfolio at fair value is diversified across 458 portfolio companies.
This means that any single investment accounts for just 0.2% of the portfolio on average and our largest investment in any single company, excluding SDLP and Ivy Hill is just one 4% of the portfolio.
So before I turn the call over to Penni, Let me discuss the significant dividend increase we announced this morning.
We elected to raise the regular quarterly dividend from <unk> 43 to.
<unk> 48 per share because the company is now experiencing a higher level of core earnings primarily due to the substantial increase in base rates.
This increased the largest quarterly increase in our company's history is our third increase this year and results in a regular dividend that is 17% higher than our.
Our regular quarterly dividend level at the end of 2021.
The higher base dividend that were paying also reflects our positive outlook on our ability to generate this level of core earnings under a variety of interest rate and economic scenarios for the foreseeable future.
As a final reminder, we've already declared a <unk> <unk> per share additional dividend for the fourth quarter.
When adding this additional dividend the total dividends for the fourth quarter funds to <unk> 51 per share.
And on our fourth quarter call, we will provide additional details on our dividends going forward and our thoughts around the potential for further additional dividends due to expected increases in core earnings and the amount of our undistributed earnings spillover.
I'd like to turn the call over to <unk> to provide some more details on third quarter results and balance sheet positioning.
Our core earnings per share.
For the third quarter of 2022, <unk> higher than a quarter ago and up three.
On the same quarter a year ago.
Earnings for the third quarter of 2022 again benefited from the higher base interest rates on our floating rate investments.
Our GAAP earnings per share for the third quarter of 2022.
Our 21 times, which compares to 22 for the prior quarter and 73 for the third quarter of 2021.
Our GAAP earnings for the third quarter of 2022 included.
And unrealized losses of 36 per share, which were largely a result of the unrealized losses for certain.
Net investment to reflect the decline in prices in the credit and equity markets mentioned earlier.
Our total portfolio at fair value at the end of the third quarter was $21 $3 billion and we had total assets of $22 billion.
As of September 32022, the weighted average yield on our debt and other income producing securities at amortized cost was 10, 7% and the weighted average yield on total investments at amortized cost was nine 6%.
The total investment yield at the end of the quarter increased approximately 90 basis points from last quarter.
Boarded by the companion ryzen base rate and the incremental spread on new investments.
As it relates to our future interest rate sensitivity, we remain well positioned to continue benefiting from a rising rate environment.
Given 73% of our total portfolio at fair value frequent floating rate investments.
September 32022.
We expect continued increases in short term rates should have a positive impact on the net interest earnings performance of the company.
A 100 basis point increase in market rates from September 30th could add about seven cents per share quarterly or approximately 27 per share annually.
We have provided details on our sensitivity to interest rate moments and this quarters Form 10-Q for those who want to further examine the potential impact.
Importantly, these earnings would be additive to the <unk> per share benefit that kipp mentioned from having a full quarter of the market rate moves that have already occurred in the third quarter fully flowing through our core earnings.
Shifting to our capitalization and liquidity after considering our investment and capital activity during the quarter. We ended the third quarter with nearly $4 $5 billion of total available liquidity, including available cash of nearly $250 million.
Debt to equity ratio net of the available cash.
124 times down from 125 times at the end of the second quarter.
Overall, with our significant dry powder and only $750 million in debt obligations maturing in the next 16 months, we believe our capital and liquidity remains one of our most significant competitive advantages and positions us well to remain active yet patient investors.
Before I conclude I want to provide more detail on our undistributed taxable income and our dividend.
Our taxable income spillover from 2021 into 2022 grew to $678 million or.
<unk> $1 36 per share.
We continue to believe that having a strong and meaningful undistributed spillover.
That's our goal of maintaining a steady dividend throughout market cycles and sets us apart from many other bdcs.
Not have nearly the level of rollover.
Having said that as a result of the increased core earnings power. We are experiencing in the entire rate environment. We expect we will see an increasing amount of undistributed earnings spillover when we close out fiscal year 2022 as compared to 2021.
So as Curt mentioned, we will provide additional.
<unk> information on our yearend earnings call on how we may address that in 2023, while factoring in today's announced increase to their regular quarterly dividend.
This morning, we announced that we declared a regular fourth quarter dividend of 48 cents per share.
<unk> per share increase to the regular dividend rate and the largest single quarter per share increase in our company's history.
This increase is also the third increase in in the past year.
Or in the past six quarters.
Our 54th consecutive quarter of unchanged or growing dividends.
This fourth quarter regular dividend is enhanced by <unk> <unk> per share additional fourth quarter dividend that we previously declared back in February .
Our payable on December 29, 2022 to stockholders of record on December 15, 2022.
I will now turn the call over to Mitch to walk through our investment activity for the quarter.
Thanks Penni.
Im going to spend a few minutes, providing more detail on our investments and portfolio performance for the third quarter and then provide an update on our post quarter end activity and our backlog and pipeline.
During the third quarter, our team originated $2 2 billion of new investment commitments across 40 transactions in more than 20 distinct industries as middle market sponsors and businesses continue to value areas being a consistent and reliable source of capital.
Market and volatile ones like the one we're in now.
As we have often said over the years, we tend to focus our originations on investments, where we have relationship or inflammation advantages and this quarter was no different at 60% of our transactions were to incumbent borrowers.
Also more than 70% of our commitments were senior secured.
Importantly, the investment opportunities in today's market a highly attractive based on our view of the market first lien spreads as an example are approximately 100 basis points higher than the five year average for similarly levered transactions.
In addition on an absolute basis first lien yields are the highest we have seen in more than a decade.
In terms of the transactions, we are executing we are providing capital to larger companies.
The EBITDA of our first lien originations this quarter was more than three times higher than our historical three year average the importance of this will be highlighted when I talk about the credit quality of the portfolio.
We believe that the current market environment offers attractive opportunities with it.
Disciplined scaled and stable capital provider to be able to capitalize on that.
Now shifting to portfolio health, our companies continued to perform well as chip mentioned.
The weighted average EBITDA growth of our company.
For the 12 months period was 13%.
Our larger portfolio of companies with EBITDA over $100 million performed particularly well and their EBITDA grew by 16% on average.
<unk> underscores the merits of our up market focus as the weighted average EBITDA of our portfolio reached $213 million in the third quarter.
This compares to the weighted average EBITDA of $66 million five years ago and reflects the demand for our financing from larger companies.
And our view all things being equal larger companies have more diverse revenue streams broader customer basis, and deeper management all of which serve to further support their credit performance.
Overall, our portfolio companies are continuing to navigate the current higher inflationary environment.
Kipp mentioned during our quarterly portfolio will review our portfolio management team alongside our field teams evaluated the impact of inflationary pressures rising energy prices supply chain disruptions and staffing shortages on our portfolio of companies.
While our analysis of industry sectors and underlying company fundamentals is subjective.
We take comfort that this quarter's portfolio review revealed a consistent overall result, with last quarters and less than 10% of our portfolio remained in the higher risk category.
Further supporting this the weighted average portfolio greater fair value for the quarter was flat at $3 two and continues to be above our 10 year average of 3.0.
Our non accruals at cost was one 6% was also flat compared to last quarter and continues to be meaningfully below our 10 year average of two 5%.
During the quarter, we had two companies to nonaccrual and removed from the list.
Now as we do on a quarterly basis, I would like to shift to a post quarter end investment activity and pipeline.
From October one through October 22022, we made new investment commitments totaling $1 1 billion of which $1 billion were funded.
Exited or repaid on $418 million of investment commitments.
The weighted average yield at cost on new first lien commitments was approximately 100 basis points higher than the weighted average yield on first lien securities, we exited or were repaid during the fourth quarter.
As of October 20, <unk>, our backlog and pipeline stood at roughly $605 million, our backlog and pipeline contains investments that are subject to approvals and documentations and may not close.
Or we may sell a portion of these investments post closing.
I'll now turn the call back over to Ken for some closing remarks.
Thanks Mitch.
Before concluding I wanted to acknowledge the leadership change that we announced this morning in a separate press release.
CT Schnabel will now join Mitch Goldstein is the co president of ARCC.
Where it has been a longtime contributor to the success of both ARCC and areas as direct lending strategy.
CT joined <unk> in 2001 and became a founding member of the U S direct lending team when our executive team joined <unk> in 2004 to launch Aries capital today.
Today CT serves as a co head of areas U S direct lending strategy and is a member of our investment Committee we.
We believe that core does the dynamic leader and we look forward to having and play a more prominent role in the company's direction in the years ahead.
As part of this change Michael Smith is stepping down as Arcc's co president to take on other responsibilities at the firm and we will continue to help lead areas as global credit group as a co head.
Given Michaels insights and leadership at the company over the last 18 years, we've appointed him to the board of directors at Ares capital.
While relinquishing some of his day to day responsibilities to court I can say, we all take comfort in knowing that he'll remain highly engaged with the company strategy as a board member.
Michael We will also continue as a member of our investment Committee.
We believe this transition further demonstrates the commitment depth and tenure of the team that continues to support the ongoing performance at ARCC.
We have confidence in our ability to continue to generate strong results for our shareholders.
This confidence in our competitive and financial position and our earnings power is reflected in our decision to meaningfully raise our regularly quarterly dividend as we highlighted earlier.
That concludes our prepared remarks, and we'd be happy to open the line for questions.
Thank you.
At this time, if you would like to ask a question. Please press Star then one on your touch phone side.
If you would like to withdraw your question. Please press star two.
Please.
See today's who may wish to ask a question. Please limit yourself to one question and one single following.
If you have additional questions you may re enter the queue.
The Investor Relations team will be able to address any further questions at the conclusion of today's call.
We have our first question on the phone lines from.
Finian O'shea with Wells Fargo Securities. Your line is open.
Hi, everyone. Good morning.
First question on the dividend you're right chip as you mentioned.
48 cents was a significant increase in.
Historically would have been a pretty good quarter for you. So.
I guess I appreciate in your commentary on being able to earn its under a variety of economic scenarios.
What if base rates and credit spreads revert back to where they were.
And then where does the earnings power come from to continue to earn that that 48.
Yes, thanks for thanks for the question Ken.
And good morning, we obviously.
Raised our dividend only when we feel that the.
Core earnings can support it over the long haul I guess is my brief comments I tried to make that clear in our prepared remarks.
As we thought about the dividend increase and how much we felt comfortable raising it. We obviously ran a lot of different sensitivities thinking about possibly future contraction in credit spreads or a reversal in great policy and all of that and I think.
Unless something.
Really severe happen quickly, which is not what we would expect we just I'll just reinforce that we feel good about this higher level of core earnings supporting the dividend.
Let's do it.
You run a model into next year and beyond.
These guys are thinking there so.
I'll take your point.
But.
We don't take raising the dividend thats substantially lightly and we obviously model a lot of sensitivities around where we go and how quickly. So they look to say the company is just earning significantly more than that 48%.
Dividend today, and we feel good about being able to be supportable into the into the future for for a while.
That's helpful. Thank you and just to.
A follow on on.
Evaluations.
The portfolio has a lot of them.
Embedded subordinate equity CLO equity for example, so at this point today with with private market transactions.
To go through at lower valuations.
How does how does the.
The BDC continue.
Continue to hold up so well.
I mean, we took the portfolio was down a fair bit this quarter.
Largely on the.
And the fact that we had declining prices in both the credit and the equity markets.
Where does it go from here I guess, we will see where the markets take us but.
Our markdowns were largely unrealized marks on the debt portfolio, although there were some as well.
The equity portfolio as you know we've got exposure.
Exposure, a fair amount of equity exposure at the company too.
I'm not quite sure on the CLO comments, just as a reminder, we don't we don't invest in third party CLO. So the only place that we'd see a valuation impact is potentially in the way, we think about SDLP in Ivy Hill.
But we look at the required yields.
On both STL.
DLP and on Ivy Hill, and one of the key considerations. There is whats gone on in the CLO market and obviously, a pretty significant sell off there. So I think we've taken that all into consideration appropriately.
Thanks, so much.
Thank you.
Thank you. The next question comes from.
Jeffrey Please go ahead when you're ready.
Morning, guys. Thanks for taking my questions and congratulations on the solid operating results.
First of all I mean, you guys gave us a pretty good constructive updates on credit quality in the portfolio.
I know you guys are followed very closely portfolio I'm. Just wondering what are you. What are you kind of what are you hearing from your counterparties in terms of how they're reacting to changing rates and inflation.
And just sort of thinking about that is it kind of colors your impression of what might happen from an economic perspective next year.
Sure. Thanks for the question just so I'm clear when you say Counterparties do you mean the portfolio companies.
Yes, the borrowers yes.
Yes.
I mean, I think look for the last 12 months most of the portfolio companies I would say they've been operating with just more challenging operating conditions right, whether it's <unk>.
We've all read about in the newspapers pressures from inflation supply chain disruption flavor shortages.
Energy price increases in certain parts of the world. So I think it's been more difficult than now there's more pressure on some of these companies because they have higher debt service costs.
My expectation would be that defaults will increase I've said this in other settings defaults will increase broadly in the corporate credit markets through the back part of this year and into next year.
As a reminder.
Say this in the prepared remarks.
The credit quality today is better than our historical averages when you look at both the non accrual rates on the portfolio grades would I expect that to get a little bit worse, if I had to guess I'd say, probably yes, but do we view it as something that is extraordinary and not manageable the answer to that is we don't.
Okay, and then I.
I guess sort of related question is.
Over time talked about how you guys are positioned well for this environment, but you also tend to do better or at least.
Take more advantage of disrupted environments and I think most of us on the call.
No that certain parts of the credit markets are somewhat disrupted now not certainly not in crisis mode, but there is some volatility and so forth.
So the question I guess.
Given that backdrop is there any area.
In the credit markets, where the disruption is sufficient enough where you are able to take advantage of it or is it or are we just sort of starting to look for opportunities in that regard.
Yes, I mean, I think the broad answer to that is the environment for new investing has improved substantially and I think most substantially at the upper end.
Range larger companies because the.
The bank solution is a very difficult solution today based on just the fact that most of the banks are working on clearing out on syndicated backlog that data cumulated look we've played.
Some new investments here coming into the fourth quarter, both then and new deals, although it's admittedly slower we've been active in the secondary markets, mostly in the existing portfolio names.
So those are probably the two areas I'd highlight and I would expect that to continue.
The activity levels we.
We didn't comment on that has slowed down pretty substantially here going into year end and we will see what next year brings.
Great. Thanks.
Thanks, a lot John .
Thank you.
We now have a question from.
Ryan Lynch with <unk>. Please go ahead, when you're ready.
Hey, good morning.
This quarter guys.
The first question I had was just related to your slide 14, which looks at.
EBITDA and and and and credit statistics.
My question is if I look at your weighted average interest coverage from the second quarter to the third quarter a decline from about two four.
To two times.
And I would assume that thats, primarily just driven by the increase in rates this quarter.
Right with the way we ended the quarter in a way that rates kind of flowed through on kind of in that one quarter lag I would assume that there's probably another 200 basis points or so.
Rising rates, which again are good for Arcc's earnings but.
It can happen pretty.
Pretty significant pressure on this ratio.
The rough math looks like it could drop it down to the low one so how should we be thinking about credit quality. That's really good today, but then look at something like this was at the trajectory of this interest coverage going probably materially lower.
Yes, I mean, I think that's directionally that's true I think if you look at the forward curve for the base rates.
It's playing out as more of a likelihood of a 100 basis point increase from here.
And then it actually starts to come back down a little bit if you look even as far forward as 2024 and 25%. So look with a 100 basis point increase in my opinion likely to your question, we do see a deterioration in interest coverage to probably one eight times.
And then we'll see where rates go from there and I think thats. The question Ryan that everyone's asking weather.
Youre, managing private credit portfolios or elsewhere, which is.
How far does the fed has to go to accomplish its objectives and what are the repercussions I think something beyond the 100 basis points is actually less likely and I think the forward curve is saying the same thing so we're working with that expectation.
But yes, we expect them to John <unk> question, we expect interest coverage ratios to go down a little bit and we expressed expect credit quality to probably get a little bit worse.
The fourth quarter and into next year, but again, we think it's manageable.
Okay.
Sense.
The other question, maybe a clarification or just excellent explanation on Ivy Hill.
If I look at your guidance disclosure.
The Ivy Hill generate income for the third quarter of this year management and incentive fees were like $13 million versus other investment related income was 42 million if I look at that a year ago.
Management incentive fees were $8 million versus other investment related income was $22 million. So the big growth in Ivy Hill income is really driven by that other investment related income at least year over year and a big dividends that that then of course ARCC is receding can you just explain what that other investment related income.
Is that.
All basically.
The subordinated tranches of CLO Securitizations that Ares holds from from those Ivy Hill CLO. So is there anything else in that bucket right there.
So thats generally what it is.
Okay, Yes, obviously Ivy Hill got larger Ivy Hill got larger the dollars go up the return that we're looking at if you take the dividend the way that I'd think about it is if you take the quarterly or the annual dividend divided by the fair value of that investment we're achieving the same rates of return there that we have historically, it's just larger so the dollars are.
Our bigger.
Yeah.
Okay Fair enough I'll hop back in the queue.
Thanks.
We now have Casey Alexander of Compass point Your line is open Casey.
Yeah.
Good morning.
Good morning, this is going to seem sort of like a siem.
Seemed like kind of.
Distended question, but I am struck by how attractive the operating environment is for you and yet at the same time, how hyper focused the market seems to be on potential credit issues.
And I look back at 2020, where it was allows the operating environment and the market was hyper focused on credit issues.
And then during that 2020 period, you guys were really overt about the extent to which you were willing to do modifications and amendments with portfolio companies and again looking at the.
Weighted average interest coverage.
Average is at two point times, you've certainly got companies below there. So you've got companies that must be internally that you're watching to what extent are you guys willing to and already starting to work on modifications and potential amendments to help make sure that your portfolio of companies get through this cycle and come out better competitors on the other.
Syed.
Yes, I mean, I would say at the margin we are Casey it has.
There is no resemblance whatsoever, frankly to the first and second quarters of 2020, where I think this company did something like 60 amendments over the course of two quarters.
So look as things again to some of the earlier questions.
Things weaken a little bit I think that's something that we're going to have to look at and we will probably become.
Increasing increasing percentage of the time spent by the team.
But.
It's not nearly as violent or frankly as difficult as it was during COVID-19 when it all came at once.
And it's a natural part of the business right I mean, if you've been doing these deals are long time like I have and our team has its just its ordinary course that you haven't been in amendment activity and you have to go into companies that aren't performing to plan and make accommodations, but keep trying to use the same word which is we think it's pretty manageable in ordinary course for now.
Okay, great. Thank you. My other question is looking at your debt to equity ratio of one seven times youre fairly in the pocket of where you want to be but would you expect origination volumes to do what they traditionally do in the fourth quarter, which is.
At least some acceleration towards the end of the fourth quarter and how would you manage net origination volume relative to the leverage ratio.
Sure. So I think we've communicated in the past and I'll say it again the leverage ratio is at the top end of our target range and we have a focus actually I'm trying to bring it down.
To your second question I think this will be.
Much much slower fourth quarter for our company and for most of the industry participants as a result of the way that the volatility has crept into the market deal flow is much slower I wouldn't expect to see that big fourth quarter out of us or many others that you've seen in previous years as it seasonally.
<unk> of.
A quarter so.
Yeah.
Alright, great. Thank you very much appreciate you taking my questions.
Yes sure. Thanks.
The next question comes from the line of Devin Ryan with JMP Securities. Please go ahead, when you're ready Devin.
Hi, Good morning, this is Kevin <unk> on for Kevin.
Most of my questions have been asked and answered, but I did have one.
<unk> on Amendment request Kipp, you mentioned that during.
Peak Covid environment that Youre seeing about 60 amendments come in.
In one quarter, so just curious where that stands on a normal basis.
Where it was last quarter.
Yes.
I'm not sure I actually im looking around at some of the team.
No.
Fiber to five centers ordinary course.
Yes.
Less than 10 a quarter.
Probably even less in five quarters that are material.
Okay. That's helpful. And then just wanted to follow up if I can.
In regards to portfolio positioning just curious are there any pockets or industries that you find particularly attractive given the current macro backdrop.
And I think youll see us stick with our focus on sort of.
Less cyclical service oriented industries that are cash flow companies that can pay down debt, even in a slower environment, but we sort of come at it a little bit differently, which is we go out with a wide funnel to look at everything.
We get asked a question sometimes of now that cyclical earnings are kind of down or are you more prone to play into those industries and answers, we're probably more willing to look at those type of transactions than we are in a in a frothy market, but we're not really changing our approach in terms of how we think about new originations and new deals.
Sure.
Okay that makes sense. Thank you for taking my questions and congratulations on the quarter.
Hey, thanks, so much.
Thank you.
Now have Melissa Wedel with Jpmorgan. Your line is open minister.
Thank you I appreciate you taking my questions. This morning, and actually most of them have already been asked but I do have one final lab to Casey's question regarding amendment activity.
When we think about it.
How that tends to occur a lot of times that involves some additional capital contribution or support from sponsors for our portfolio companies and I am curious what you are seeing.
In terms of what how you perceive.
Sponsor's willingness to.
Support the portfolio companies in this environment as we've seen some change in private market valuations generally.
Yes, I mean, I think it continues to be pretty good most and thanks for the question.
To be honest most of our amendment activity now unlike during Covid, where we saw big liquidity shortfalls in company that required equity to come in as more technical in nature, where covenant gets tripped or company needs a little more access to capital through a revolver or something the tips.
The amendment is the group charges a fee they reset some of the loan documentation and covenants and exchange for the fee and potentially some higher pricing.
And I think the positioning of private equity is and frankly, our capital is the duration of their investments are all extended here right, we're going to see fewer repayments I think we're likely to see fewer.
Deals get done because it's difficult time to buy or sell a company. So the relationship benefit of being with a private credit provider like Aries is actually a benefit right. So you can pay a small fee can pay slightly incremental pricing and then you've got a.
Three or four year look at the equity investment that you've made.
Most of our portfolio comes in substantially below 50% LTV and just as a reminder, there's lots and lots of equity supporting the loans that we make.
So the positioning and the and the response from private equity has continued to be quite good at least in that portion of the portfolio.
Okay, and just to clarify am I hearing that because of the difference in the environment now and the more technical nature of any amendment activity that might be needed therapy, what's required.
Support from sponsors.
I think thats right, yes, maybe I didn't say that.
Thanks.
Got it thank you so much.
Yes Youre welcome.
Yeah.
We now have Kenneth Lee with RBC capital market. Your line is open Kenneth.
Hi, good morning, and thanks for taking my question.
Just one on wondering if you could.
And upon your comments you talked about an opportunity to improve your portfolio in the current environment and it sounds like you're shifting a little bit more towards the larger size companies wondering if theres any other aspects that you're looking to improve in terms of the portfolio in this environment. Thanks.
I mean pretty consistent with our past philosophy I mean, the reality is if a company gets offsides a little bit today.
It's easier for us to have a discussion with.
With a sponsor with the company about how there.
They are financing from three years ago, perhaps is not resembling the current market conditions. If they have to refinance today and that just gives us a little bit more.
Strength in our argument as we say I think we deserve a higher fee or we deserve.
More pricing here to compensate for the increased risk that we werent expecting so and the market conditions widened it just improves our ability as risk managers to kind of re rate in the portfolio a little bit of something is outperforming the plan.
Sure.
Got you very helpful. Thanks again.
Okay. Thanks, Ken.
Thank you as a reminder to ask any more questions. Please press star followed by one on your telephone keypad.
The next question comes from the line of Robert Dodd with Raymond James Your line is open.
Morning, Kipp and beating on a dead horse.
Amendments.
One of the the.
Things I think mix shift.
His prepared remarks was less than I think you mentioned that less than 10% of the portfolio is what's what you would classify as the high risk exposures to inflation et cetera et cetera.
Not quite dynamics going on.
Can you give us any color on.
Now.
Aggressive quite like how aggressively you are you in.
Going to those companies potentially.
Encouraging or pushing.
We're recommending amendments to the high risk category.
Head of the potential problem or is that just something you don't do you wait for the problem puts you in a stronger position or are you more.
Proactive.
On kind of all of those problems.
The event.
Yes.
Look I mean, I think the relationship for the lender to the equity.
Since a lot of the deals that we do or repeat with sponsors as is one where we're pretty balanced.
I think most of the let's talk about private equity transaction closer to private equity transactions or private equity firms, we do business with I'd like to think U S is value added we tend to have larger portfolios than they do and.
And we tend to have more insight into industries, and frankly credit markets than they do so if we see something because as you know we've got close contact with them.
We started to talk to them about it early and say you know we have investments in eight other companies that are pretty tangential to this company and this is what we're seeing and these are some of the pressures that we see mounting for other companies and just start to ask the questions are you seeing the same pressures what what's your level of concern.
So it's really about just increasing the dialogue.
Which we think is value added for a lot of our partners, but the reality is you don't get into discussions about amendments and less something.
Trips your loan documentation or a company really is going to need capital in advance of that happening which is unusual.
So hopefully thats helpful.
Robert.
Yes.
But I just wanted to add this is this is a fluid type of process. So we are constantly getting information on our portfolio companies weekly and monthly and the minute, we see some weakness and we have a very large portfolio management team as I think you know, we're beginning dialogue with the company and the sponsors as to what is happening what needs to be fixed if anything.
And getting way ahead of any really serious weakness well before the company meets an amendment, it's a constant dialogue with our companies because of our access to information.
And our relationship with the companies on the sponsors.
I appreciate that thank you.
Thank you.
Thank you.
We now have a question from.
And next week.
Please go ahead can you maybe Eric.
Good morning, just to follow on the other line of questioning about the expectations for increasing corporate default.
Curious if you can provide some color into what quantitative metrics you may be monitoring that are starting to maybe show some signs of weakness at this point and do you have a view of which industries or verticals may experience more stress first or do you think the stress can be more idiosyncratic and borrower specific.
I mean, typically it's more and thanks for the question, it's more idiosyncratic, but obviously the metric that we're looking at is we're monitoring interest coverage across the portfolio and at each company as well as fixed charge coverage, which takes into account sort of other debt service costs the companies have.
We don't see any particular.
Industries today that represent a broad risk.
One of the things that I think we've mentioned to you and you're picking up coverage was that we've tended to shy away from certain industries that do create in our opinion and if you look historically, the most defaults right and we're under weighted towards a lot of these industries. So I think our portfolio is performing better than the indices.
It usually does as a result of that.
<unk> and positioning.
But for now it's probably more of a name by name assessment.
And to Michel's comments being close to our borrowers and understanding where there is the potential for stress in trouble on the horizon.
Great. Thanks for taking my question.
Sure you're welcome.
Thank you.
This does conclude our question and answer session I would like to turn the conference to Mr. <unk> for any closing remarks.
Sure I'll just thank everyone for joining us.
Frankly, we thought this was a great quarter and we think the company is really well positioned going forward, but again, thanks for your participation and your questions and we will catch you next quarter.
Ladies and gentlemen, this concludes our conference call for today.
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Okay.
Yes.